Peak Oil

We're still on the slippery slope to peak oil

Technology and exploitation of unconventional sources can't defer the long-predicted decline in global oil production

David Strahan

Scientific American,

20 August, 2012

IN 2007 former US energy secretary James Schlesinger claimed the arguments in favour of peak oil - the key theory that global production must peak and then decline - had been won. With production flat and prices surging towards an all-time high of $147 per barrel, he declared, "we are all peakists now".

Five years on and production has risen by 2.7 million barrels per day to 93 mb/d, prices have recently slumped to around $100 a barrel and those who dismissed the idea that the rate we extract oil from the ground must inevitably decline jeer in delight.

In June a much-touted report by Leonardo Maugeri - an Italian oil executive now at the Geopolitics of Energy Project, based at Harvard University and part-funded by BP - forecast that far from running out of oil, this decade will see the strongest growth in production capacity since the 1980s and a "significant, stable dip of oil prices".

So is that it, panic over, as some commentators who once agreed with the peak view have declared on the basis of Maugeri's report? Ironically, such shifts come just as some economists - traditionally hostile to peak theory - were coming round to it. Peakonomics, if you will. Unfortunately, any reasonable reading suggests Maugeri is wide of the mark.

The recent hysteria rests heavily on the rise of shale oil in the US, which was unforeseen and is significant. After four decades of decline, US oil production turned in 2005 and has generated the bulk of the global supply growth since then. But to brand this a "paradigm-shifter", as Maugeri does, is wrong.

He forecast that this boom will lead to an astonishing 4 mb/d of additional US shale production capacity by 2020. By contrast, the US Department of Energy, usually optimistic, predicts total US shale oil production will peak at just 1.3 mb/d in 2027.

One reason Maugeri's forecast is so high is that he assumes production from existing shale wells will decline by just 15 per cent per year.

Industry consultant Art Berman puts decline rates at around 40 per cent. Analysis by Bob Bracket of US market analysts Bernstein Research shows similarly steep declines, and also that the average shale well takes just six years to become a "stripper well" - producing just 10 to 15 barrels a day. Such declines are far higher than for conventional wells, effectively meaning the industry must drill furiously just to stand still. It is this factor that will limit future production growth.

It is distressing that Maugeri's report - which appears to contain glaring mathematical mistakes - got so much attention, but he insists the gist of his report is right. In contrast, an excellent International Monetary Fund working paper in May received much less attention.

The IMF's paper sets out to test the idea that the recent 10-year rise in the oil price - it hit a low of $10 a barrel in the late 1990s - can be explained by geological constraints. The team took an approach which expresses mathematically the idea that oil becomes harder to produce, the less there remains to be produced - the basis of peak oil theory. This is clearly right: why would we be scraping out tar sands if there were easy oil left?

When they combined this with the impact of global GDP and oil price, the results were striking. By testing their model against historical data, they found their production forecasts were more accurate than those of both peak oilers, who are traditionally too pessimistic, and authorities such as the US Energy Information Administration, which is generally far too optimistic.

Their price forecasts were also far more accurate than traditional economic models that take no account of oil depletion, predicting a strong upward trend that closely fits what has happened since 2003. "When you look at the oil price [over the past decade], the trend is almost entirely explained by the geological view," said Michael Kumhof, one of the authors, when I interviewed him earlier this year.

The IMF paper also slays the belief that rising oil prices will liberate vast new supplies and vanquish peak oil. The team found that production growth has halved since 2005, and forecast that even the lower rate of growth will only be sustained if the oil price soars to $180 by 2020. "Our prediction of small further increases in world oil production comes at the expense of a near doubling, permanently, of real oil prices over the coming decade," write the authors. In this context, shale oil is not a "game-changer" but a sign of desperation. "We have to do these really expensive and really environmentally messy things just in order to stand still or grow a little," says Kumhof.

It is true that global oil production has not yet peaked, but that is almost beside the point. The people who fixate on this need to wake up and smell the fumes we are reduced to running on. The IMF paper shows clearly we are supply-constrained. The oil price itself ought to be a clue: persistently above $100 per barrel, 10 times higher than it was at the eve of the 21st century.

Price spikes in recent years and recessions are the inevitable outcome of rising competition from fast-growing developing economies for limited supplies. Domestic consumption among major producers such as Saudi Arabia is also soaring, reducing supply to others. While global production rose in the five years to 2010, global net exports fell by 3 mb/d, according to independent US geologist Jeff Brown. How much worse would you like it?

In the film No Country for Old Men, two lawmen find the aftermath of a drug deal gone bad, with corpses strewn about the desert. The deputy remarks, "It's a mess, ain't it, sheriff?", to which the sheriff replies: "Well, if it ain't, it'll do til the mess gets here."

Likewise, if peak oil has not yet arrived, what I call the last oil shock certainly has. It'll do til the peak gets here.

David Strahan is an energy writer and author of The Last Oil Shock (John Murray, 2008)